By Ira J. Kreft, SVP, Central Region Marketing Manager, Bank of America Business Capital,
Bank of America Merrill Lynch
Private equity sponsors have a long history of using asset-based lending to finance their transactions. In the early 1980s, a book entitled “Left Hand Financing” chronicled how private equity players employed asset-based lending in their financing structure.
Over the years, asset-based lending has evolved considerably, providing liquidity and flexibility at an attractive cost of capital. As it has evolved, its attractiveness expanded from Main Street to Wall Street. And, in certain sectors/industries, it is the financing structure of choice. The ability to pair it with a wide array of other debt products has further expanded its applicability. In 1Q 2017, private equity sponsor backed issuance represented over one-third of asset-based lending volume. The Basic Structure
The structural building blocks of an asset-based loan are the company's assets. The fixed assets can be included as either an amortizing component of the revolver or as an amortizing term loan. It is a misnomer to describe asset-based lending as only current asset financing. And, it is also a misnomer that such facilities be used only for working capital and liquidity purposes. It can be used for financing a portion of the purchase price, as well.
It may also be possible to structure advances against intellectual property. The focus of the valuation of the collateral is what could be realized against the assets in a distressed sale. Other ways of creating incremental liquidity in an asset-based structure are ("First-In, Last-Out") tranches, which provide higher advances against eligible accounts receivable and inventory and structured advances that are recaptured over several years through scheduled amortization and an excess cash flow sweep.